Archive: August, 2006

Personal income in July was $11,015.2, up 0.5% from June. Nominal personal consumption expenditures (PCE) rose 0.8%, while real PCE increased 0.5%. Nominal disposable personal income (DPI) rose 0.7% while real DPI increased 0.3%. The personal savings rate as a percentage of DPI was -0.9% in July.The Good

Canada’s Goldcorp Inc. (TSX:G.TO – News) said on Thursday it will acquire U.S.-based Glamis Gold Ltd. for about US$8.6 billion in stock, a deal that will push it firmly into the ranks of senior producers.

Glamis’s shareholders will receive 1.69 Goldcorp shares for each share of Glamis, representing a value of $51.49 per share based on Goldcorp’s August 30 closing price. That’s a premium of 32.7 percent to Glamis’ closing price.

The news sent shares of Glamis up 20 percent to $46.47 on the New York Stock Exchange. Goldcorp stock was down 8.6 percent at $27.85.

It would be much better performance-wise if we were only picking the acquiree, not the acquiror as well. But since the portfolio was equal-weighted the 20% gain in Glamis trumps the decline in Goldcorp. So we’ll take it.

Embraer said it will start delivering the 50 E145 and 50 larger E190 jets in 2007, and analysts described the order as a significant entry into the important Asian market for a company whose commercial jet sales have been largely stagnant in recent years.”This deal substantially raises the company’s firm order backlog, which had been stuck at around $10 billion for some time,” said Pedro Galdi, aviation analyst at ABN Amro in Sao Paulo.

The purchase from the state-owned HNA Group that owns Hainan raises Embraer’s firm orders by about 25 percent to $13.6 billion, analysts estimated. It also means Embraer will deliver more planes than the 150 that had been predicted for 2007 and increase deliveries in 2008.

Any given order is a positive sign, but by the time the news is out it is difficult for investors to take advantage of it. Rather, investors should buy if they expect other similar announcements in the future. We think there are several reasons to expect this may happen:

The only most successful US airline, Southwest (LUV) earned its success by offering non-stop flights from smaller airports. Rejional jets could open point-to-point non-stop service to an even larger number of even smaller airports – paving the way for the next Southwest.

Smaller jets can be loaded and unloaded quickly, saving precious time for passengers and precious money for the operator – who can keep the jets flying (earning money) rather than sitting on the ground (costing money).

Smaller airports allow passengers to pass more quickly through security, further saving time. Plus, greater point-to-point service to more markets means they also save time by not having to connect through hubs.

Lacking the dramatic potential of larger jets, regional jets are likely to be avoided by terrorists.

We recently profiled the travails of Human Resources outsourcing firm Hewitt (HEW). Although the stock price had triggered a buy alert we previously set, the uncertainty regarding past revenue (which now is being restated) caused us to remain on the sidelines.

Then yesterday we read an interesting article from Morningstar called Four Top HR Outsourcing Stocks. In many ways, Morningstar appears to share our views.

One caveat though–the one-stop-shop HR outsourcing model has struggled. Often termed human resource business process outsourcing, this new offering focuses on large corporations–usually with more than 10,000 employees–and handles nearly every HR function. Although it has great potential to cut costs for clients, the benefits are much less evident for the service provider.

That sounds quite a bit like our own comment, “One of the things we like about the HR Outsourcing business is that the complexity of the HR function makes many companies prefer not to do it themselves. For the same reason, we wonder why there are so many companies willing to do it for others.” The high competition drove Hewitt to price contracts too aggressively, and was the source of their latest slip.

Still, Morningstar lists Hewitt as one of their fab four, saying:

Hewitt’s position as both a consulting and outsourcing firm creates valuable synergies. With the information accumulated from its benefits outsourcing experience, Hewitt consults for firms that need help with benefit programs but aren’t willing to take the outsourcing leap. Through its 60-year history, Hewitt has gained expertise that keeps more than 90% of its clients coming back every year.

Recently, Hewitt’s stock has been hurt by troubles in its HR business process outsourcing service. Unfortunately, Hewitt swam too deep before the waters in this complicated business had been tested. Still, Hewitt’s non-HR business process outsourcing business (80% of revenue) continues to perform and generates more than enough value to support our opinion that Hewitt’s stock is cheap.

On this we disagree. Our previous conclusion still holds:

Furthermore, the lack of profitability shows that Hewitt was too aggressive in pursuing contracts. As a result, investors should not expect the company to grow as fast as the historic results would suggest. This is already showing, with consulting revenues down 3% year-to-date.

So what we’ve got here are shares that are pricing in no growth on an EV/FCF basis, an assumption that seems appropriate given the circumstances. We’ve also got a company with what we estimate as sustainable earnings power of $1.00 per share – on which a share price of $20+ appears on the high side in the current market.

A Credit Suisse analyst downgraded shares of Rockwell Automation Inc. Wednesday, saying the factory automation equipment maker’s stock has few reasons to grow.Credit Suisse analyst Nicole Parent reduced her rating to “Underperform” from “Neutral” and lowered her target price to $58 from $64.

Shares have increased about 60 percent due to good news over the past couple years, as the company refocused on efficiency, end market diversity, global expansion, and spinoffs of segments, wrote Parent.

But while the stock is down about 28 percent from its 52-week high of $79.47 on April 24, shares are unlikely to rise, Parent said, because she believes investors have already priced the good news into the stock, and that margins are likely to come under pressure down the road.

A 28% decline means investors are pricing in good news? I’d hate to see what happens when they price in bad news – or perhaps in the Sell Side’s alternate universe it would take a 50% rally for the bad news to be priced in. Here is what we had to say in our previous post, which we continue to believe:

Not the kind of news one expects to send a stock down more than 10 percent for the day. In part, Wall Street was disappointed that after beating estimates the full-year guidance wasn’t really raised. In fact, some analysts consider the company to have reduced guidance:

Deutsche Bank analyst Nigel Coe wrote in a research note that the profit beat Wall Street expectations largely due to a lower-than-expected tax rate. The lower tax rate, he said, means that “the quality of this (full year profit forecast) number has been lowered.”

Whatever. Management reiterated on the call their past comments that the tax rate can jump around from quarter to quarter due to the timing of various items.

This all brings us back to April, 2005. The stock sold off sharply because the company “missed” its earnings target for the quarter. Problem is, Rockwell doesn’t give quarterly guidance. The high ticket prices of their equipment means there is too much volatility in quarterly numbers just because a sale occurs a few days earlier or later than the quarter end. No matter. Wall Street came up with their estimates and punished the stock for failing to meet them.

Of course, the company went on to exceed the annual guidance it had provided, the selloff marked the low of the year and by the following April the share price had nearly doubled.
We can understand the analyst’s embarassment as the shares have fallen this year. It has happened to everyone. We would also be willing to listen to reasonable arguments as to what has changed in the fundamental story for Rockwell. But the reasons listed by Credit Suisse were much more valid at $79 than they are today at $56.

Oil inventory data was released yesterday, and continues to point to tight supplies. On the basis of days of supply in stock, the long-term downtrend remains unbroken. While oil bears point to high storage capacity utilization, our response is that building storage tanks is far easier than developing new supplies or refining capacity.

Also:

NanoSolar wants to use its thin-film solar technology in large-scale applications.

We posted earlier about the housing slowdown, now dramatically apparent in the GDP numbers. We posted a while ago about how business spending (20 percent of GDP) would have a hard time making up for a consumer (60 percent of GDP) slowdown, but noted last week that the orders and sales for durable goods were stronger than the headline suggested.

Now this. The red bars show the year/year growth in GDP, which has been much smoother than those erratic numbers we get by seasonally adjusting quarterly data and then annualizing it (anyone else think the seasonal adjustments must be a little fishy?) The blue line is business spending on tech equipment and software, which is really starting to look tired.

The mixed data shows why both the Fed and the markets are indecisive of late. For tech spending, it all may rest on acceptance of Microsoft Vista.

As if we needed any more proof, we were able to draw up this nifty little chart from this morning’s GDP Release. It shows the direct contribution to GDP growth (i.e. the 2.9% headline number in today’s release) that was contributed by growth in residential fixed investment (source: Bureau of Economic Analysis).

Keep in mind, this shows only the direct impact, on housing construction itself. The total effect will include mortgage brokerage, real estate brokerage, any impacts on consumer spending….

Add a slowdown in transportation to the housing slowdown and rising gas prices as indications the economy is slowing dramatically. FedEx (FDX - Annual Report) is down nearly 20% from recent highs, and the sector as a whole has posted mediocre performance. Yesterday, Watch List member Landstar (LSTR - Annual Report) hosted its mid-quarter conference call, where instead of raising guidance as is their custom they merely reaffirmed existing guidance.

The third quarter appears generally to be shaping up as we thought. However, we have seen some softening in certain accounts as previously mentioned. Based upon the continuation of current business levels, and the anticipated increase in seasonal demand in the September period, I’m reaffirming our prior revenue guidance for the 2006 third quarter for revenue in a range of 645 million to $665 million.

Landstar is likely to make up any shortfalls through their FEMA contract, under which they provide transportation for disaster relief, clean-up and rebuilding. Although it looks to be a relatively minor storm, Landstar has already been activated to prepare for Ernesto.

Other transportation names have more to be concerned about, and bulls should be concerned by the growing number of signals that the economic slowdown may be more than a soft landing.